GROWTH STRATEGY

Marketing Myopiaby Theodore Levitt

FROM THE JULY 2004 ISSUE

We always know when an HBR article hits the big time. Journalists write about it,

pundits talk about it, executives route copies of it around the organization, and its

vocabulary becomes familiar to managers everywhere—sometimes to the point where

they don’t even associate the words with the original article. Most important, of

course, managers change how they do business because the ideas in the piece helped

them see issues in a new light.

“Marketing Myopia” is the quintessential big hit HBR piece. In it, Theodore Levitt,

who was then a lecturer in business administration at the Harvard Business School,

introduced the famous question, “What business are you really in?” and with it the

E

claim that, had railroad executives seen themselves as being in the transportation

business rather than the railroad business, they would have continued to grow. The

article is as much about strategy as it is about marketing, but it also introduced the

most influential marketing idea of the past half-century: that businesses will do better

in the end if they concentrate on meeting customers’ needs rather than on selling

products. “Marketing Myopia” won the McKinsey Award in 1960.

very major industry was once a growth industry. But some that are now

riding a wave of growth enthusiasm are very much in the shadow of decline.

Others that are thought of as seasoned growth industries have actually

stopped growing. In every case, the reason growth is threatened, slowed, or stopped

is not because the market is saturated. It is because there has been a failure of

management.

Fateful Purposes

The failure is at the top. The executives responsible for it, in the last analysis, are

those who deal with broad aims and policies. Thus:

• The railroads did not stop growing because the need for passenger and freight

transportation declined. That grew. The railroads are in trouble today not because

that need was filled by others (cars, trucks, airplanes, and even telephones) but

because it was not filled by the railroads themselves. They let others take customers

away from them because they assumed themselves to be in the railroad business

rather than in the transportation business. The reason they defined their industry

incorrectly was that they were railroad oriented instead of transportation oriented;

they were product oriented instead of customer oriented.

• Hollywood barely escaped being totally ravished by television. Actually, all the

established film companies went through drastic reorganizations. Some simply

disappeared. All of them got into trouble not because of TV’s inroads but because of

their own myopia. As with the railroads, Hollywood defined its business

incorrectly. It thought it was in the movie business when it was actually in the

entertainment business. “Movies” implied a specific, limited product. This

produced a fatuous contentment that from the beginning led producers to view TV

as a threat. Hollywood scorned and rejected TV when it should have welcomed it as

an opportunity—an opportunity to expand the entertainment business.

Today, TV is a bigger business than the old narrowly defined movie business ever

was. Had Hollywood been customer oriented (providing entertainment) rather than

product oriented (making movies), would it have gone through the fiscal purgatory

that it did? I doubt it. What ultimately saved Hollywood and accounted for its

resurgence was the wave of new young writers, producers, and directors whose

previous successes in television had decimated the old movie companies and toppled

the big movie moguls.

There are other, less obvious examples of industries that have been and are now

endangering their futures by improperly defining their purposes. I shall discuss some

of them in detail later and analyze the kind of policies that lead to trouble. Right now,

it may help to show what a thoroughly customer-oriented management can do to

keep a growth industry growing, even after the obvious opportunities have been

exhausted, and here there are two examples that have been around for a long time.

They are nylon and glass—specifically, E.I. du Pont de Nemours and Company and

Corning Glass Works.

Both companies have great technical competence. Their product orientation is

unquestioned. But this alone does not explain their success. After all, who was more

pridefully product oriented and product conscious than the erstwhile New England

textile companies that have been so thoroughly massacred? The DuPonts and the

Cornings have succeeded not primarily because of their product or research

orientation but because they have been thoroughly customer oriented also. It is

constant watchfulness for opportunities to apply their technical know-how to the

creation of customer-satisfying uses that accounts for their prodigious output of

successful new products. Without a very sophisticated eye on the customer, most of

their new products might have been wrong, their sales methods useless.

Aluminum has also continued to be a growth industry, thanks to the efforts of two

wartime-created companies that deliberately set about inventing new customer-

satisfying uses. Without Kaiser Aluminum & Chemical Corporation and Reynolds

Metals Company, the total demand for aluminum today would be vastly less.

Error of Analysis.

Some may argue that it is foolish to set the railroads off against aluminum or the

movies off against glass. Are not aluminum and glass naturally so versatile that the

industries are bound to have more growth opportunities than the railroads and the

movies? This view commits precisely the error I have been talking about. It defines an

industry or a product or a cluster of know-how so narrowly as to guarantee its

premature senescence. When we mention “railroads,” we should make sure we mean

“transportation.” As transporters, the railroads still have a good chance for very

considerable growth. They are not limited to the railroad business as such (though in

my opinion, rail transportation is potentially a much stronger transportation medium

than is generally believed).

What the railroads lack is not opportunity but some of the managerial

imaginativeness and audacity that made them great. Even an amateur like Jacques

Barzun can see what is lacking when he says, “I grieve to see the most advanced

physical and social organization of the last century go down in shabby disgrace for

lack of the same comprehensive imagination that built it up. [What is lacking is] the

will of the companies to survive and to satisfy the public by inventiveness and skill.”

Shadow of Obsolescence

It is impossible to mention a single major industry that did not at one time qualify for

the magic appellation of “growth industry.” In each case, the industry’s assumed

strength lay in the apparently unchallenged superiority of its product. There appeared

to be no effective substitute for it. It was itself a runaway substitute for the product it

so triumphantly replaced. Yet one after another of these celebrated industries has

come under a shadow. Let us look briefly at a few more of them, this time taking

examples that have so far received a little less attention.

Dry Cleaning.

This was once a growth industry with lavish prospects. In an age of wool garments,

imagine being finally able to get them clean safely and easily. The boom was on. Yet

here we are 30 years after the boom started, and the industry is in trouble. Where has

the competition come from? From a better way of cleaning? No. It has come from

synthetic fibers and chemical additives that have cut the need for dry cleaning. But

this is only the beginning. Lurking in the wings and ready to make chemical dry

cleaning totally obsolete is that powerful magician, ultrasonics.

Electric Utilities.

This is another one of those supposedly “no substitute” products that has been

enthroned on a pedestal of invincible growth. When the incandescent lamp came

along, kerosene lights were finished. Later, the waterwheel and the steam engine

were cut to ribbons by the flexibility, reliability, simplicity, and just plain easy

availability of electric motors. The prosperity of electric utilities continues to wax

1

extravagant as the home is converted into a museum of electric gadgetry. How can

anybody miss by investing in utilities, with no competition, nothing but growth

ahead?

But a second look is not quite so comforting. A score of nonutility companies are well

advanced toward developing a powerful chemical fuel cell, which could sit in some

hidden closet of every home silently ticking off electric power. The electric lines that

vulgarize so many neighborhoods would be eliminated. So would the endless

demolition of streets and service interruptions during storms. Also on the horizon is

solar energy, again pioneered by nonutility companies.

Who says that the utilities have no competition? They may be natural monopolies

now, but tomorrow they may be natural deaths. To avoid this prospect, they too will

have to develop fuel cells, solar energy, and other power sources. To survive, they

themselves will have to plot the obsolescence of what now produces their livelihood.

Grocery Stores.

Many people find it hard to realize that there ever was a thriving establishment

known as the “corner store.” The supermarket took over with a powerful

effectiveness. Yet the big food chains of the 1930s narrowly escaped being completely

wiped out by the aggressive expansion of independent supermarkets. The first

genuine supermarket was opened in 1930, in Jamaica, Long Island. By 1933,

supermarkets were thriving in California, Ohio, Pennsylvania, and elsewhere. Yet the

established chains pompously ignored them. When they chose to notice them, it was

with such derisive descriptions as “cheapy,” “horse-and-buggy,” “cracker-barrel

storekeeping,” and “unethical opportunists.”

The executive of one big chain announced at the time that he found it “hard to believe

that people will drive for miles to shop for foods and sacrifice the personal service

chains have perfected and to which [the consumer] is accustomed.” As late as 1936,

the National Wholesale Grocers convention and the New Jersey Retail Grocers

Association said there was nothing to fear. They said that the supers’ narrow appeal to

the price buyer limited the size of their market. They had to draw from miles around.

When imitators came, there would be wholesale liquidations as volume fell. The high

sales of the supers were said to be partly due to their novelty. People wanted

convenient neighborhood grocers. If the neighborhood stores would “cooperate with

their suppliers, pay attention to their costs, and improve their service,” they would be

able to weather the competition until it blew over.

It never blew over. The chains discovered that survival required going into the

supermarket business. This meant the wholesale destruction of their huge

investments in corner store sites and in established distribution and merchandising

methods. The companies with “the courage of their convictions” resolutely stuck to

the corner store philosophy. They kept their pride but lost their shirts.

A Self-Deceiving Cycle.

But memories are short. For example, it is hard for people who today confidently hail

the twin messiahs of electronics and chemicals to see how things could possibly go

wrong with these galloping industries. They probably also cannot see how a

reasonably sensible businessperson could have been as myopic as the famous Boston

millionaire who early in the twentieth century unintentionally sentenced his heirs to

poverty by stipulating that his entire estate be forever invested exclusively in electric

streetcar securities. His posthumous declaration, “There will always be a big demand

for efficient urban transportation,” is no consolation to his heirs, who sustain life by

pumping gasoline at automobile filling stations.

2

3

Yet, in a casual survey I took among a group of intelligent business executives, nearly

half agreed that it would be hard to hurt their heirs by tying their estates forever to

the electronics industry. When I then confronted them with the Boston streetcar

example, they chorused unanimously, “That’s different!” But is it? Is not the basic

situation identical?

In truth, there is no such thing as a growth industry, I believe. There are only

companies organized and operated to create and capitalize on growth opportunities.

Industries that assume themselves to be riding some automatic growth escalator

invariably descend into stagnation. The history of every dead and dying “growth”

industry shows a self-deceiving cycle of bountiful expansion and undetected decay.

There are four conditions that usually guarantee this cycle:

1. The belief that growth is assured by an expanding and more affluent population;

2. The belief that there is no competitive substitute for the industry’s major product;

3. Too much faith in mass production and in the advantages of rapidly declining unit

It is hard for people who hail the twin messiahs of electronics and chemicals to see how things could possibly go wrong with these galloping industries.

The history of every dead and dying “growth” industry shows a self-deceiving cycle of bountiful expansion and undetected decay.

costs as output rises;

4. Preoccupation with a product that lends itself to carefully controlled scientific

experimentation, improvement, and manufacturing cost reduction.

I should like now to examine each of these conditions in some detail. To build my case

as boldly as possible, I shall illustrate the points with reference to three industries:

petroleum, automobiles, and electronics. I’ll focus on petroleum in particular,

because it spans more years and more vicissitudes. Not only do these three industries

have excellent reputations with the general public and also enjoy the confidence of

sophisticated investors, but their managements have become known for progressive

thinking in areas like financial control, product research, and management training. If

obsolescence can cripple even these industries, it can happen anywhere.

Population Myth

The belief that profits are assured by an expanding and more affluent population is

dear to the heart of every industry. It takes the edge off the apprehensions everybody

understandably feels about the future. If consumers are multiplying and also buying

more of your product or service, you can face the future with considerably more

comfort than if the market were shrinking. An expanding market keeps the

manufacturer from having to think very hard or imaginatively. If thinking is an

intellectual response to a problem, then the absence of a problem leads to the absence

of thinking. If your product has an automatically expanding market, then you will not

give much thought to how to expand it.

If thinking is an intellectual response to a problem, then the absence of a problem leads to the absence of thinking.

One of the most interesting examples of this is provided by the petroleum industry.

Probably our oldest growth industry, it has an enviable record. While there are some

current concerns about its growth rate, the industry itself tends to be optimistic.

But I believe it can be demonstrated that it is undergoing a fundamental yet typical

change. It is not only ceasing to be a growth industry but may actually be a declining

one, relative to other businesses. Although there is widespread unawareness of this

fact, it is conceivable that in time, the oil industry may find itself in much the same

position of retrospective glory that the railroads are now in. Despite its pioneering

work in developing and applying the present-value method of investment evaluation,

in employee relations, and in working with developing countries, the petroleum

business is a distressing example of how complacency and wrongheadedness can

stubbornly convert opportunity into near disaster.

One of the characteristics of this and other industries that have believed very strongly

in the beneficial consequences of an expanding population, while at the same time

having a generic product for which there has appeared to be no competitive

substitute, is that the individual companies have sought to outdo their competitors by

improving on what they are already doing. This makes sense, of course, if one

assumes that sales are tied to the country’s population strings, because the customer

can compare products only on a feature-by-feature basis. I believe it is significant, for

example, that not since John D. Rockefeller sent free kerosene lamps to China has the

oil industry done anything really outstanding to create a demand for its product. Not

even in product improvement has it showered itself with eminence. The greatest

single improvement—the development of tetraethyl lead—came from outside the

industry, specifically from General Motors and DuPont. The big contributions made

by the industry itself are confined to the technology of oil exploration, oil production,

and oil refining.

Asking for Trouble.

In other words, the petroleum industry’s efforts have focused on improving the

efficiency of getting and making its product, not really on improving the generic

product or its marketing. Moreover, its chief product has continually been defined in

the narrowest possible terms—namely, gasoline, not energy, fuel, or transportation.

This attitude has helped assure that:

• Major improvements in gasoline quality tend not to originate in the oil industry. The development of superior alternative fuels also comes from outside the oil industry, as will be shown later.

• Major innovations in automobile fuel marketing come from small, new oil companies that are not primarily preoccupied with production or refining. These are the companies that have been responsible for the rapidly expanding multipump gasoline stations, with their successful emphasis on large and clean layouts, rapid and efficient driveway service, and quality gasoline at low prices.

Thus, the oil industry is asking for trouble from outsiders. Sooner or later, in this land

of hungry investors and entrepreneurs, a threat is sure to come. The possibility of this

will become more apparent when we turn to the next dangerous belief of many

managements. For the sake of continuity, because this second belief is tied closely to

the first, I shall continue with the same example.

The Idea of Indispensability.

The petroleum industry is pretty much convinced that there is no competitive

substitute for its major product, gasoline—or, if there is, that it will continue to be a

derivative of crude oil, such as diesel fuel or kerosene jet fuel.

There is a lot of automatic wishful thinking in this assumption. The trouble is that

most refining companies own huge amounts of crude oil reserves. These have value

only if there is a market for products into which oil can be converted. Hence the

tenacious belief in the continuing competitive superiority of automobile fuels made

from crude oil.

This idea persists despite all historic evidence against it. The evidence not only shows

that oil has never been a superior product for any purpose for very long but also that

the oil industry has never really been a growth industry. Rather, it has been a

succession of different businesses that have gone through the usual historic cycles of

growth, maturity, and decay. The industry’s overall survival is owed to a series of

miraculous escapes from total obsolescence, of last-minute and unexpected reprieves

from total disaster reminiscent of the perils of Pauline.

The Perils of Petroleum.

To illustrate, I shall sketch in only the main episodes. First, crude oil was largely a

patent medicine. But even before that fad ran out, demand was greatly expanded by

the use of oil in kerosene lamps. The prospect of lighting the world’s lamps gave rise

to an extravagant promise of growth. The prospects were similar to those the industry

now holds for gasoline in other parts of the world. It can hardly wait for the

underdeveloped nations to get a car in every garage.

In the days of the kerosene lamp, the oil companies competed with each other and

against gaslight by trying to improve the illuminating characteristics of kerosene.

Then suddenly the impossible happened. Edison invented a light that was totally

nondependent on crude oil. Had it not been for the growing use of kerosene in space

heaters, the incandescent lamp would have completely finished oil as a growth

industry at that time. Oil would have been good for little else than axle grease.

Then disaster and reprieve struck again.

Two great innovations occurred, neither

originating in the oil industry. First, the

successful development of coal-burning

domestic central-heating systems made

the space heater obsolete. While the

industry reeled, along came its most

magnificent boost yet: the internal combustion engine, also invented by outsiders.

Then, when the prodigious expansion for gasoline finally began to level off in the

1920s, along came the miraculous escape of the central oil heater. Once again, the

escape was provided by an outsider’s invention and development. And when that

market weakened, wartime demand for aviation fuel came to the rescue. After the

war, the expansion of civilian aviation, the dieselization of railroads, and the

explosive demand for cars and trucks kept the industry’s growth in high gear.

Meanwhile, centralized oil heating—whose boom potential had only recently been

proclaimed—ran into severe competition from natural gas. While the oil companies

themselves owned the gas that now competed with their oil, the industry did not

originate the natural gas revolution, nor has it to this day greatly profited from its gas

ownership. The gas revolution was made by newly formed transmission companies

that marketed the product with an aggressive ardor. They started a magnificent new

industry, first against the advice and then against the resistance of the oil companies.

By all the logic of the situation, the oil companies themselves should have made the

gas revolution. They not only owned the gas, they also were the only people

experienced in handling, scrubbing, and using it and the only people experienced in

pipeline technology and transmission. They also understood heating problems. But,

partly because they knew that natural gas would compete with their own sale of

heating oil, the oil companies pooh-poohed the potential of gas. The revolution was

finally started by oil pipeline executives who, unable to persuade their own

companies to go into gas, quit and organized the spectacularly successful gas

transmission companies. Even after their success became painfully evident to the oil

companies, the latter did not go into gas transmission. The multibillion-dollar

business that should have been theirs went to others. As in the past, the industry was

blinded by its narrow preoccupation with a specific product and the value of its

reserves. It paid little or no attention to its customers’ basic needs and preferences.

The postwar years have not witnessed any change. Immediately after World War II,

the oil industry was greatly encouraged about its future by the rapid increase in

demand for its traditional line of products. In 1950, most companies projected annual

rates of domestic expansion of around 6% through at least 1975. Though the ratio of

crude oil reserves to demand in the free world was about 20 to 1, with 10 to 1 being

usually considered a reasonable working ratio in the United States, booming demand

sent oil explorers searching for more without sufficient regard to what the future

really promised. In 1952, they “hit” in the Middle East; the ratio skyrocketed to 42 to

1. If gross additions to reserves continue at the average rate of the past five years (37

billion barrels annually), then by 1970, the reserve ratio will be up to 45 to 1. This

abundance of oil has weakened crude and product prices all over the world.

An Uncertain Future.

Management cannot find much consolation today in the rapidly expanding

petrochemical industry, another oil-using idea that did not originate in the leading

firms. The total U.S. production of petrochemicals is equivalent to about 2% (by

volume) of the demand for all petroleum products. Although the petrochemical

industry is now expected to grow by about 10% per year, this will not offset other

drains on the growth of crude oil consumption. Furthermore, while petrochemical

products are many and growing, it is important to remember that there are

nonpetroleum sources of the basic raw material, such as coal. Besides, a lot of plastics

can be produced with relatively little oil. A 50,000-barrel-per-day oil refinery is now

considered the absolute minimum size for efficiency. But a 5,000-barrel-per-day

chemical plant is a giant operation.

Oil has never been a continuously strong growth industry. It has grown by fits and

starts, always miraculously saved by innovations and developments not of its own

making. The reason it has not grown in a smooth progression is that each time it

thought it had a superior product safe from the possibility of competitive substitutes,

the product turned out to be inferior and notoriously subject to obsolescence. Until

now, gasoline (for motor fuel, anyhow) has escaped this fate. But, as we shall see

later, it too may be on its last legs.

The point of all this is that there is no guarantee against product obsolescence. If a

company’s own research does not make a product obsolete, another’s will. Unless an

industry is especially lucky, as oil has been until now, it can easily go down in a sea of

red figures—just as the railroads have, as the buggy whip manufacturers have, as the

corner grocery chains have, as most of the big movie companies have, and, indeed, as

many other industries have.

The best way for a firm to be lucky is to make its own luck. That requires knowing

what makes a business successful. One of the greatest enemies of this knowledge is

mass production.

Production Pressures

Mass production industries are impelled by a great drive to produce all they can. The

prospect of steeply declining unit costs as output rises is more than most companies

can usually resist. The profit possibilities look spectacular. All effort focuses on

production. The result is that marketing gets neglected.

John Kenneth Galbraith contends that just the opposite occurs. Output is so

prodigious that all effort concentrates on trying to get rid of it. He says this accounts

for singing commercials, the desecration of the countryside with advertising signs,

and other wasteful and vulgar practices. Galbraith has a finger on something real, but

he misses the strategic point. Mass production does indeed generate great pressure to

“move” the product. But what usually gets emphasized is selling, not marketing.

Marketing, a more sophisticated and complex process, gets ignored.

The difference between marketing and selling is more than semantic. Selling focuses

on the needs of the seller, marketing on the needs of the buyer. Selling is preoccupied

with the seller’s need to convert the product into cash, marketing with the idea of

satisfying the needs of the customer by means of the product and the whole cluster of

things associated with creating, delivering, and, finally, consuming it.

In some industries, the enticements of full mass production have been so powerful

that top management in effect has told the sales department, “You get rid of it; we’ll

worry about profits.” By contrast, a truly marketing-minded firm tries to create value-

satisfying goods and services that consumers will want to buy. What it offers for sale

includes not only the generic product or service but also how it is made available to

the customer, in what form, when, under what conditions, and at what terms of trade.

Most important, what it offers for sale is determined not by the seller but by the

buyer. The seller takes cues from the buyer in such a way that the product becomes a

consequence of the marketing effort, not vice versa.

A Lag in Detroit.

This may sound like an elementary rule of business, but that does not keep it from

being violated wholesale. It is certainly more violated than honored. Take the

automobile industry.

4

Here mass production is most famous, most honored, and has the greatest impact on

the entire society. The industry has hitched its fortune to the relentless requirements

of the annual model change, a policy that makes customer orientation an especially

urgent necessity. Consequently, the auto companies annually spend millions of

dollars on consumer research. But the fact that the new compact cars are selling so

well in their first year indicates that Detroit’s vast researches have for a long time

failed to reveal what customers really wanted. Detroit was not convinced that people

wanted anything different from what they had been getting until it lost millions of

customers to other small-car manufacturers.

How could this unbelievable lag behind consumer wants have been perpetuated for so

long? Why did not research reveal consumer preferences before consumers’ buying

decisions themselves revealed the facts? Is that not what consumer research is for—to

find out before the fact what is going to happen? The answer is that Detroit never

really researched customers’ wants. It only researched their preferences between the

kinds of things it had already decided to offer them. For Detroit is mainly product

oriented, not customer oriented. To the extent that the customer is recognized as

having needs that the manufacturer should try to satisfy, Detroit usually acts as if the

job can be done entirely by product changes. Occasionally, attention gets paid to

financing, too, but that is done more in order to sell than to enable the customer to

buy.

As for taking care of other customer needs, there is not enough being done to write

about. The areas of the greatest unsatisfied needs are ignored or, at best, get stepchild

attention. These are at the point of sale and on the matter of automotive repair and

maintenance. Detroit views these problem areas as being of secondary importance.

That is underscored by the fact that the retailing and servicing ends of this industry

are neither owned and operated nor controlled by the manufacturers. Once the car is

produced, things are pretty much in the dealer’s inadequate hands. Illustrative of

Detroit’s arms-length attitude is the fact that, while servicing holds enormous sales-

stimulating, profit-building opportunities, only 57 of Chevrolet’s 7,000 dealers

provide night maintenance service.

Motorists repeatedly express their dissatisfaction with servicing and their

apprehensions about buying cars under the present selling setup. The anxieties and

problems they encounter during the auto buying and maintenance processes are

probably more intense and widespread today than many years ago. Yet the

automobile companies do not seem to listen to or take their cues from the anguished

consumer. If they do listen, it must be through the filter of their own preoccupation

with production. The marketing effort is still viewed as a necessary consequence of

the product—not vice versa, as it should be. That is the legacy of mass production,

with its parochial view that profit resides essentially in low-cost full production.

What Ford Put First.

The profit lure of mass production obviously has a place in the plans and strategy of

business management, but it must always follow hard thinking about the customer.

This is one of the most important lessons we can learn from the contradictory

behavior of Henry Ford. In a sense, Ford was both the most brilliant and the most

senseless marketer in American history. He was senseless because he refused to give

the customer anything but a black car. He was brilliant because he fashioned a

production system designed to fit market needs. We habitually celebrate him for the

wrong reason: for his production genius. His real genius was marketing. We think he

was able to cut his selling price and therefore sell millions of $500 cars because his

The marketing effort is still viewed as a necessary consequence of the product—not vice versa, as it should be.

invention of the assembly line had reduced the costs. Actually, he invented the

assembly line because he had concluded that at $500 he could sell millions of cars.

Mass production was the result, not the cause, of his low prices.

Ford emphasized this point repeatedly, but a nation of production-oriented business

managers refuses to hear the great lesson he taught. Here is his operating philosophy

as he expressed it succinctly:

Our policy is to reduce the price, extend the operations, and improve the article. You

will notice that the reduction of price comes first. We have never considered any costs

as fixed. Therefore we first reduce the price to the point where we believe more sales

will result. Then we go ahead and try to make the prices. We do not bother about the

costs. The new price forces the costs down. The more usual way is to take the costs

and then determine the price; and although that method may be scientific in the

narrow sense, it is not scientific in the broad sense, because what earthly use is it to

know the cost if it tells you that you cannot manufacture at a price at which the article

can be sold? But more to the point is the fact that, although one may calculate what a

cost is, and of course all of our costs are carefully calculated, no one knows what a

cost ought to be. One of the ways of discovering…is to name a price so low as to force

everybody in the place to the highest point of efficiency. The low price makes

everybody dig for profits. We make more discoveries concerning manufacturing and

selling under this forced method than by any method of leisurely investigation.

Product Provincialism.

The tantalizing profit possibilities of low unit production costs may be the most

seriously self-deceiving attitude that can afflict a company, particularly a “growth”

company, where an apparently assured expansion of demand already tends to

undermine a proper concern for the importance of marketing and the customer.

5

The usual result of this narrow preoccupation with so-called concrete matters is that

instead of growing, the industry declines. It usually means that the product fails to

adapt to the constantly changing patterns of consumer needs and tastes, to new and

modified marketing institutions and practices, or to product developments in

competing or complementary industries. The industry has its eyes so firmly on its

own specific product that it does not see how it is being made obsolete.

The classic example of this is the buggy whip industry. No amount of product

improvement could stave off its death sentence. But had the industry defined itself as

being in the transportation business rather than in the buggy whip business, it might

have survived. It would have done what survival always entails—that is, change. Even

if it had only defined its business as providing a stimulant or catalyst to an energy

source, it might have survived by becoming a manufacturer of, say, fan belts or air

cleaners.

What may someday be a still more classic example is, again, the oil industry. Having

let others steal marvelous opportunities from it (including natural gas, as already

mentioned; missile fuels; and jet engine lubricants), one would expect it to have taken

steps never to let that happen again. But this is not the case. We are now seeing

extraordinary new developments in fuel systems specifically designed to power

automobiles. Not only are these developments concentrated in firms outside the

petroleum industry, but petroleum is almost systematically ignoring them, securely

content in its wedded bliss to oil. It is the story of the kerosene lamp versus the

incandescent lamp all over again. Oil is trying to improve hydrocarbon fuels rather

than develop any fuels best suited to the needs of their users, whether or not made in

different ways and with different raw materials from oil.

Here are some things that nonpetroleum companies are working on:

• More than a dozen such firms now have advanced working models of energy systems which, when perfected, will replace the internal combustion engine and eliminate the demand for gasoline. The superior merit of each of these systems is their elimination of frequent, time-consuming, and irritating refueling stops. Most of these systems are fuel cells designed to create electrical energy directly from chemicals without combustion. Most of them use chemicals that are not derived from oil—generally, hydrogen and oxygen.

• Several other companies have advanced models of electric storage batteries designed to power automobiles. One of these is an aircraft producer that is working jointly with several electric utility companies. The latter hope to use off-peak generating capacity to supply overnight plug-in battery regeneration. Another company, also using the battery approach, is a medium-sized electronics firm with extensive small-battery experience that it developed in connection with its work on hearing aids. It is collaborating with an automobile manufacturer. Recent improvements arising from the need for high-powered miniature power storage plants in rockets have put us within reach of a relatively small battery capable of withstanding great overloads or surges of power. Germanium diode applications and batteries using sintered plate and nickel cadmium techniques promise to make a revolution in our energy sources.

• Solar energy conversion systems are also getting increasing attention. One usually cautious Detroit auto executive recently ventured that solar-powered cars might be common by 1980.

As for the oil companies, they are more or

less “watching developments,” as one

research director put it to me. A few are

doing a bit of research on fuel cells, but

this research is almost always confined to

developing cells powered by hydrocarbon

chemicals. None of them is

enthusiastically researching fuel cells, batteries, or solar power plants. None of them

is spending a fraction as much on research in these profoundly important areas as it is

on the usual run-of-the-mill things like reducing combustion chamber deposits in

gasoline engines. One major integrated petroleum company recently took a tentative

look at the fuel cell and concluded that although “the companies actively working on

it indicate a belief in ultimate success…the timing and magnitude of its impact are too

remote to warrant recognition in our forecasts.”

One might, of course, ask, Why should the oil companies do anything different?

Would not chemical fuel cells, batteries, or solar energy kill the present product lines?

The answer is that they would indeed, and that is precisely the reason for the oil

firms’ having to develop these power units before their competitors do, so they will

not be companies without an industry.

Management might be more likely to do what is needed for its own preservation if it

thought of itself as being in the energy business. But even that will not be enough if it

persists in imprisoning itself in the narrow grip of its tight product orientation. It has

to think of itself as taking care of customer needs, not finding, refining, or even selling

oil. Once it genuinely thinks of its business as taking care of people’s transportation

needs, nothing can stop it from creating its own extravagantly profitable growth.

Creative Destruction.

Since words are cheap and deeds are dear, it may be appropriate to indicate what this

kind of thinking involves and leads to. Let us start at the beginning: the customer. It

can be shown that motorists strongly dislike the bother, delay, and experience of

buying gasoline. People actually do not buy gasoline. They cannot see it, taste it, feel

it, appreciate it, or really test it. What they buy is the right to continue driving their

cars. The gas station is like a tax collector to whom people are compelled to pay a

M

periodic toll as the price of using their cars. This makes the gas station a basically

unpopular institution. It can never be made popular or pleasant, only less unpopular,

less unpleasant.

Reducing its unpopularity completely means eliminating it. Nobody likes a tax

collector, not even a pleasantly cheerful one. Nobody likes to interrupt a trip to buy a

phantom product, not even from a handsome Adonis or a seductive Venus. Hence,

companies that are working on exotic fuel substitutes that will eliminate the need for

frequent refueling are heading directly into the outstretched arms of the irritated

motorist. They are riding a wave of inevitability, not because they are creating

something that is technologically superior or more sophisticated but because they are

satisfying a powerful customer need. They are also eliminating noxious odors and air

pollution.

Once the petroleum companies recognize the customer-satisfying logic of what

another power system can do, they will see that they have no more choice about

working on an efficient, long-lasting fuel (or some way of delivering present fuels

without bothering the motorist) than the big food chains had a choice about going

into the supermarket business or the vacuum tube companies had a choice about

making semiconductors. For their own good, the oil firms will have to destroy their

own highly profitable assets. No amount of wishful thinking can save them from the

necessity of engaging in this form of “creative destruction.”

I phrase the need as strongly as this because I think management must make quite an

effort to break itself loose from conventional ways. It is all too easy in this day and age

for a company or industry to let its sense of purpose become dominated by the

economies of full production and to develop a dangerously lopsided product

orientation. In short, if management lets itself drift, it invariably drifts in the direction

of thinking of itself as producing goods and services, not customer satisfactions.

While it probably will not descend to the depths of telling its salespeople, “You get rid

of it; we’ll worry about profits,” it can, without knowing it, be practicing precisely that

formula for withering decay. The historic fate of one growth industry after another

has been its suicidal product provincialism.

Dangers of R&D

Another big danger to a firm’s continued growth arises when top management is

wholly transfixed by the profit possibilities of technical research and development. To

illustrate, I shall turn first to a new industry—electronics—and then return once more

to the oil companies. By comparing a fresh example with a familiar one, I hope to

emphasize the prevalence and insidiousness of a hazardous way of thinking.

Marketing Shortchanged.

In the case of electronics, the greatest danger that faces the glamorous new

companies in this field is not that they do not pay enough attention to research and

development but that they pay too much attention to it. And the fact that the fastest-

growing electronics firms owe their eminence to their heavy emphasis on technical

research is completely beside the point. They have vaulted to affluence on a sudden

crest of unusually strong general receptiveness to new technical ideas. Also, their

success has been shaped in the virtually guaranteed market of military subsidies and

by military orders that in many cases actually preceded the existence of facilities to

make the products. Their expansion has, in other words, been almost totally devoid of

marketing effort.

Thus, they are growing up under conditions that come dangerously close to creating

the illusion that a superior product will sell itself. It is not surprising that, having

created a successful company by making a superior product, management continues

to be oriented toward the product rather than the people who consume it. It develops

the philosophy that continued growth is a matter of continued product innovation

and improvement.

A number of other factors tend to strengthen and sustain this belief:

1. Because electronic products are highly complex and sophisticated, managements

become top-heavy with engineers and scientists. This creates a selective bias in favor

of research and production at the expense of marketing. The organization tends to

view itself as making things rather than as satisfying customer needs. Marketing gets

treated as a residual activity, “something else” that must be done once the vital job of

product creation and production is completed.

2. To this bias in favor of product research, development, and production is added the

bias in favor of dealing with controllable variables. Engineers and scientists are at

home in the world of concrete things like machines, test tubes, production lines, and

even balance sheets. The abstractions to which they feel kindly are those that are

testable or manipulatable in the laboratory or, if not testable, then functional, such as

Euclid’s axioms. In short, the managements of the new glamour-growth companies

It is not surprising that, having created a successful company by making a superior product, management continues to be oriented toward the product rather than the people who consume it.

tend to favor business activities that lend themselves to careful study,

experimentation, and control—the hard, practical realities of the lab, the shop, and

the books.

What gets shortchanged are the realities of

the market. Consumers are unpredictable,

varied, fickle, stupid, shortsighted,

stubborn, and generally bothersome. This

is not what the engineer managers say, but

deep down in their consciousness, it is

what they believe. And this accounts for their concentration on what they know and

what they can control—namely, product research, engineering, and production. The

emphasis on production becomes particularly attractive when the product can be

made at declining unit costs. There is no more inviting way of making money than by

running the plant full blast.

The top-heavy science-engineering-production orientation of so many electronics

companies works reasonably well today because they are pushing into new frontiers

in which the armed services have pioneered virtually assured markets. The companies

are in the felicitous position of having to fill, not find, markets, of not having to

discover what the customer needs and wants but of having the customer voluntarily

come forward with specific new product demands. If a team of consultants had been

assigned specifically to design a business situation calculated to prevent the

emergence and development of a customer-oriented marketing viewpoint, it could

not have produced anything better than the conditions just described.

Stepchild Treatment.

The oil industry is a stunning example of how science, technology, and mass

production can divert an entire group of companies from their main task. To the

extent the consumer is studied at all (which is not much), the focus is forever on

getting information that is designed to help the oil companies improve what they are

now doing. They try to discover more convincing advertising themes, more effective

sales promotional drives, what the market shares of the various companies are, what

people like or dislike about service station dealers and oil companies, and so forth.

Nobody seems as interested in probing deeply into the basic human needs that the

industry might be trying to satisfy as in probing into the basic properties of the raw

material that the companies work with in trying to deliver customer satisfactions.

Basic questions about customers and markets seldom get asked. The latter occupy a

stepchild status. They are recognized as existing, as having to be taken care of, but not

worth very much real thought or dedicated attention. No oil company gets as excited

about the customers in its own backyard as about the oil in the Sahara Desert. Nothing

illustrates better the neglect of marketing than its treatment in the industry press.

The centennial issue of the American Petroleum Institute Quarterly, published in 1959

to celebrate the discovery of oil in Titusville, Pennsylvania, contained 21 feature

articles proclaiming the industry’s greatness. Only one of these talked about its

achievements in marketing, and that was only a pictorial record of how service station

architecture has changed. The issue also contained a special section on “New

Horizons,” which was devoted to showing the magnificent role oil would play in

America’s future. Every reference was ebulliently optimistic, never implying once

that oil might have some hard competition. Even the reference to atomic energy was a

cheerful catalog of how oil would help make atomic energy a success. There was not a

single apprehension that the oil industry’s affluence might be threatened or a

suggestion that one “new horizon” might include new and better ways of serving oil’s

present customers.

But the most revealing example of the stepchild treatment that marketing gets is still

another special series of short articles on “The Revolutionary Potential of

Electronics.” Under that heading, this list of articles appeared in the table of contents:

• “In the Search for Oil”

• “In Production Operations”

• “In Refinery Processes”

• “In Pipeline Operations”

Significantly, every one of the industry’s major functional areas is listed, except

marketing. Why? Either it is believed that electronics holds no revolutionary potential

for petroleum marketing (which is palpably wrong), or the editors forgot to discuss

marketing (which is more likely and illustrates its stepchild status).

The order in which the four functional areas are listed also betrays the alienation of

the oil industry from the consumer. The industry is implicitly defined as beginning

with the search for oil and ending with its distribution from the refinery. But the truth

is, it seems to me, that the industry begins with the needs of the customer for its

products. From that primal position its definition moves steadily back stream to areas

of progressively lesser importance until it finally comes to rest at the search for oil.

The Beginning and End.

The view that an industry is a customer-satisfying process, not a goods-producing

process, is vital for all businesspeople to understand. An industry begins with the

customer and his or her needs, not with a patent, a raw material, or a selling skill.

Given the customer’s needs, the industry develops backwards, first concerning itself

with the physical delivery of customer satisfactions. Then it moves back further to

creating the things by which these satisfactions are in part achieved. How these

materials are created is a matter of indifference to the customer, hence the particular

form of manufacturing, processing, or what have you cannot be considered as a vital

aspect of the industry. Finally, the industry moves back still further to finding the raw

materials necessary for making its products.

The irony of some industries oriented toward technical research and development is

that the scientists who occupy the high executive positions are totally unscientific

when it comes to defining their companies’ overall needs and purposes. They violate

the first two rules of the scientific method: being aware of and defining their

companies’ problems and then developing testable hypotheses about solving them.

They are scientific only about the convenient things, such as laboratory and product

experiments.

The customer (and the satisfaction of his or her deepest needs) is not considered to be

“the problem”—not because there is any certain belief that no such problem exists but

because an organizational lifetime has conditioned management to look in the

opposite direction. Marketing is a stepchild.

I do not mean that selling is ignored. Far from it. But selling, again, is not marketing.

As already pointed out, selling concerns itself with the tricks and techniques of

getting people to exchange their cash for your product. It is not concerned with the

values that the exchange is all about. And it does not, as marketing invariably does,

view the entire business process as consisting of a tightly integrated effort to discover,

create, arouse, and satisfy customer needs. The customer is somebody “out there”

who, with proper cunning, can be separated from his or her loose change.

Actually, not even selling gets much attention in some technologically minded firms.

Because there is a virtually guaranteed market for the abundant flow of their new

products, they do not actually know what a real market is. It is as if they lived in a

planned economy, moving their products routinely from factory to retail outlet. Their

successful concentration on products tends to convince them of the soundness of

what they have been doing, and they fail to see the gathering clouds over the market.

• • •

Less than 75 years ago, American railroads enjoyed a fierce loyalty among astute Wall

Streeters. European monarchs invested in them heavily. Eternal wealth was thought

to be the benediction for anybody who could scrape together a few thousand dollars

to put into rail stocks. No other form of transportation could compete with the

railroads in speed, flexibility, durability, economy, and growth potentials.

As Jacques Barzun put it, “By the turn of the century it was an institution, an image of

man, a tradition, a code of honor, a source of poetry, a nursery of boyhood desires, a

sublimest of toys, and the most solemn machine—next to the funeral hearse—that

marks the epochs in man’s life.”

Even after the advent of automobiles, trucks, and airplanes, the railroad tycoons

remained imperturbably self-confident. If you had told them 60 years ago that in 30

years they would be flat on their backs, broke, and pleading for government subsidies,

they would have thought you totally demented. Such a future was simply not

considered possible. It was not even a discussable subject, or an askable question, or a

matter that any sane person would consider worth speculating about. Yet a lot of

“insane” notions now have matter-of-fact acceptance—for example, the idea of 100-

ton tubes of metal moving smoothly through the air 20,000 feet above the earth,

loaded with 100 sane and solid citizens casually drinking martinis—and they have

dealt cruel blows to the railroads.

6

What specifically must other companies do to avoid this fate? What does customer

orientation involve? These questions have in part been answered by the preceding

examples and analysis. It would take another article to show in detail what is required

for specific industries. In any case, it should be obvious that building an effective

customer-oriented company involves far more than good intentions or promotional

tricks; it involves profound matters of human organization and leadership. For the

present, let me merely suggest what appear to be some general requirements.

The Visceral Feel of Greatness.

Obviously, the company has to do what survival demands. It has to adapt to the

requirements of the market, and it has to do it sooner rather than later. But mere

survival is a so-so aspiration. Anybody can survive in some way or other, even the

skid row bum. The trick is to survive gallantly, to feel the surging impulse of

commercial mastery: not just to experience the sweet smell of success but to have the

visceral feel of entrepreneurial greatness.

No organization can achieve greatness without a vigorous leader who is driven

onward by a pulsating will to succeed. A leader has to have a vision of grandeur, a

vision that can produce eager followers in vast numbers. In business, the followers are

the customers.

In order to produce these customers, the entire corporation must be viewed as a

customer-creating and customer-satisfying organism. Management must think of

itself not as producing products but as providing customer-creating value

satisfactions. It must push this idea (and everything it means and requires) into every

nook and cranny of the organization. It has to do this continuously and with the kind

of flair that excites and stimulates the people in it. Otherwise, the company will be

merely a series of pigeonholed parts, with no consolidating sense of purpose or

direction.

In short, the organization must learn to think of itself not as producing goods or

services but as buying customers, as doing the things that will make people want to do

business with it. And the chief executive has the inescapable responsibility for

creating this environment, this viewpoint, this attitude, this aspiration. The chief

executive must set the company’s style, its direction, and its goals. This means

knowing precisely where he or she wants to go and making sure the whole

organization is enthusiastically aware of where that is. This is a first requisite of

leadership, for unless a leader knows where he is going, any road will take him there.

If any road is okay, the chief executive might as well pack his attaché case and go

fishing. If an organization does not know or care where it is going, it does not need to

advertise that fact with a ceremonial figurehead. Everybody will notice it soon

enough.

1. Jacques Barzun, “Trains and the Mind of Man,” Holiday, February 1960.

2. For more details, see M.M. Zimmerman, The Super Market: A Revolution in

Distribution (McGraw-Hill, 1955).

3. Ibid., pp. 45–47.

4. John Kenneth Galbraith, The Affluent Society (Houghton Mifflin, 1958).

5. Henry Ford, My Life and Work (Doubleday, 1923).

6. Barzun, “Trains and the Mind of Man.”